SHOW ALL STEPS

Question 3 (7 points) Angelo is considering the purchase of a new equipment to replace an old one. Both items have a 25% CCA rate. The new equipment costs $13,300 and have a useful life of four years, at which time it will have a salvage of zero. The old equipment can be sold now for $630 and could be scrapped for $380 in four years. The operating revenues will increase annually by $9,500 with the new equipment. The tax rate is 22% and the required rate of return is 15%. i. What is the present value of CCA tax shield for the new equipment? [1.5 marks] What is the present value of incremental operating cashflow for the new equipment? [2 marks] What is the NPV of the replacement decision? Should Angelo replace the old equipment with the new one? (3.5 marks] ii. iii. Question 3 (7 points) Angelo is considering the purchase of a new equipment to replace an old one. Both items have a 25% CCA rate. The new equipment costs $13,300 and have a useful life of four years, at which time it will have a salvage of zero. The old equipment can be sold now for $630 and could be scrapped for $380 in four years. The operating revenues will increase annually by $9,500 with the new equipment. The tax rate is 22% and the required rate of return is 15%. i. What is the present value of CCA tax shield for the new equipment? [1.5 marks] What is the present value of incremental operating cashflow for the new equipment? [2 marks] What is the NPV of the replacement decision? Should Angelo replace the old equipment with the new one? (3.5 marks]